By Jayant M. Thakur
Chartered Accountant
BACKGROUND
Informal guidance has not been discussed in this column recently. A
recent informal guidance by SEBI gives an opportunity to refresh this useful
method of obtaining guidance of the regulator and in a fairly interesting
manner.
Informal guidance is a speedy way to know the mind of SEBI – or at least
of the relevant department – on a regulatory issue one is facing in an actual
case. One may be proposing to enter into a transaction or may be facing an
issue on interpretation of legal provisions. One then approaches SEBI with an
application giving the facts and the regulatory issues involved / queries and
SEBI gives its informal guidance. One could compare this with the advance
rulings as available under other laws, but the analogy should not be taken too
far. Informal guidance has a limited binding effect. In law, it can even be
reversed / ignored by SEBI itself, as will be seen in some detail later in this
article. Nevertheless, it has been useful in several cases.
WHAT IS INFORMAL GUIDANCE AND WHAT IS THE REGULATORY
BACKING?
SEBI introduced the Securities and Exchange Board of India (Informal
Guidance) Scheme, 2003 (the Scheme) in June, 2003. It is issued u/s 11(1) of
the SEBI Act and is thus a kind of measure in relation to securities markets
that SEBI has implemented. It does not have the status of a formal regulation
or rule and thus its legal status is limited. As we shall see, the Scheme
itself repeatedly mentions that the guidance given under it has limited binding
effect.
Nevertheless, it is a useful form of seeking guidance or ruling from
SEBI on how the relevant department of SEBI would view a particular situation
in the context of the relevant provisions of the securities laws. The person
desiring it approaches SEBI giving all relevant facts and the precise issue on
which he desires clarification. A fairly time-bound reply is generally given.
Who can approach SEBI for informal guidance?
Specified persons associated with capital markets can approach SEBI for
informal guidance. Those eligible include registered intermediaries (i.e.,
stock brokers, portfolio managers, etc.), listed companies (and also companies
proposing to get their securities listed and that have filed their offer
document / listing application), an acquirer / prospective acquirer under the
SEBI Takeover Regulations, etc.
What are the types of informal guidance that may be applied for?
There are two types of informal guidance that can be applied for. One is
a ‘no-action letter’. A person lays down the detailed proposed transaction he
desires to undertake and seeks guidance from SEBI on how it would view it. The
department concerned at SEBI may provide a ‘no-action letter’ whereby it would
not recommend any action to be taken under the applicable securities laws if
such a transaction is undertaken.
The second type is an ‘interpretive letter’ where again the SEBI
department concerned provides an interpretation and answer on an issue of law
under any of the securities laws in the context of the specified facts /
proposed transaction.
What are the fees?
A sum of Rs. 25,000 is to be paid as application fees. If the
application is rejected because it pertains to a matter where informal guidance
cannot be given, the fees are refunded after deducting Rs. 5,000 as processing
fee. If the application is rejected because the request for confidentiality
(discussed later herein) is not accepted, the fee will be refunded.
What is the time period for issue of informal guidance by SEBI?
The application has to be disposed of as early as possible, but not
later than 60 days of its receipt.
What are the situations under which informal guidance will not be
granted?
Applications have to be based on factual situations, even if proposed.
Thus, applications with hypothetical situations or in which the applicant has
no direct / proximate interests are rejected. If the matter is already covered
by an earlier informal guidance, the application may be rejected giving a
reference to the earlier one. In particular, if enforcement action is already
taken on the matter (investigation, inquiry, etc.) or any connected matter is sub
judice, then the application would be rejected.
However, the grant of informal guidance is not a right and SEBI may not
respond at all and also does not have to answer why it has not responded.
Confidentiality of application / informal guidance
The application and response thereto is published for public viewing by
SEBI. A party may have reasons to keep the application confidential and may
make such a request in its application. SEBI may consider this request and
either accept it or reject it and refund the application fees. If it accepts
the request for confidentiality, the response of SEBI would be kept
confidential for a period of up to 90 days.
WHAT IS THE BINDING NATURE OF AN INFORMAL GUIDANCE?
The informal guidance, while comparable in concept, is not an advance
ruling by SEBI and hence does not have an element of finality. It is issued by
the particular department of SEBI and although SEBI may act generally in
accordance with it, the view is not binding on SEBI. It is not conclusive and
cannot be appealed against. It is also on the facts provided, and if the
proposed transaction deviates from such facts, the informal guidance may not
cover it.
As we shall see later, there has been a case where SEBI issued a
different guidance in a later case. SAT has also had occasion to examine the
nature of an informal guidance and the extent to which it is final, appealable,
etc.
These factors are surely to be noted. However, despite this, the utility
of informal guidance cannot be understated. It can be quite helpful and even
the limited assurance that the department / SEBI will generally act according
to the guidance would be helpful in most cases.
Case study of a recent informal guidance in the matter of Takeover
Regulations and Insider Trading
The case shows how relatively simple transactions can have several implications
under detailed and complex laws. This is in the matter of proposed transactions
by the promoters of HEG Limited (SEBI informal guidance dated 4th
June, 2020).
The core issues were relatively simple. Some of the promoters of a
listed company had dealt in the shares of such company in the market. Now, they
desired to transfer some shares among themselves. Such inter se transfer
would mean that the overall holding of the Promoter Group would remain the
same, even if the holdings of individual promoters could rise / fall.
However, this
proposal of inter se transfer raised several issues. The first related
to certain provisions in the SEBI insider trading regulations which prohibit
‘contra’ trades on specified insiders for six months. Thus, if such a person
has bought shares, he cannot sell the same for six months. And vice versa.
As stated earlier, some promoters had dealt in the shares and hence concern
arose whether there would be a bar on further transactions. The question thus
was whether such prohibition would apply to the whole Promoter Group or
only to those persons who had earlier traded in the shares. SEBI replied that
it would apply only to those who had traded in the shares and not to the whole
Promoter Group.
An incidental question was whether transactions inter se the
Promoters would attract the ‘trading window’ restrictions. Insiders are
prohibited from trading during the time when the ‘trading window’ is closed.
This is usually so when there is unpublished price sensitive information which
is very likely to be accessed by the insiders. SEBI replied that since the
transfer was within the Promoter Group where both parties could be said to be
aware and thus would make a conscious and informed decision, the transaction
was covered by a specific exception in the Regulations. Hence, such transfer
would not attract the prohibition.
The third and final question was whether the inter se transfer
would be exempt from open offer requirements? A person / group holding more
than 25% shares can acquire up to 5% shares in a financial year. If the
acquisitions are more than this limit, an open offer is required. Inter se
transfers are exempted, but subject to certain conditions. However, in the
present case it was stated that the proposed inter se transfer was less
than 5%. Subject to compliance with the other conditions, the reply was that
the proposed transfer would not attract the open offer requirements.
Thus, a simple proposed transaction that could have serious consequences
was resolved by clear guidance from SEBI. If the transactions are completed in
the manner described in the application, there is a reasonable, even if not
conclusive, assurance that SEBI will not take a different view and initiate
proceedings having serious repercussions.
SAT DECISIONS WHERE INFORMAL GUIDANCE HAS BEEN
EXAMINED
In Deepak Mehra vs. SEBI [2010] 98 SCL 126 (SAT-Mum.), a
question arose that in the context of a takeover transaction involving a
complex restructuring / issue of securities, would the requirements of open
offer be attracted? SEBI was approached for informal guidance and the relevant
department opined that, on the facts, the open offer requirement would be
attracted only at a later stage on conversion of securities. A shareholder
filed an appeal to the Securities Appellate Tribunal (SAT) against such
informal guidance. SAT answered some basic questions on informal guidance.
Firstly, it described the nature of informal guidance and whether it can be
appealed against. It observed, ‘Clause 13 thereof also makes it clear that a
letter giving an informal guidance by way of interpretation of any provision of
law or fact should not be construed as a conclusive decision or determination
of those questions and that such an interpretation cannot be construed as an
order of the Board under section 15T of the Act… The informal guidance given by
the general manager is not an “order” which could entitle anyone to
file an appeal.’
Thus, the informal guidance is not a conclusive decision on the issues,
nor is it an order of SEBI.
There is also the case of Arbutus Consultancy LLP vs. SEBI [2017]
81 taxmann.com 30 (SAT–Mum.) where an interesting point arose. SEBI had
given an informal guidance earlier and in the appeal before SAT, the appellant
sought to rely on it and claimed that SEBI could not depart from it. Several
questions arose. How much weightage should be given to an informal guidance by
SEBI in another case and also by SAT? Secondly, can SEBI give a different informal
guidance in another matter? And if so, can an appellant still claim that the
first informal guidance should be relied upon in his case? SAT held that an
informal guidance that is erroneous can be rejected by SEBI itself and, of
course, also by SAT. A mistake by an officer of SEBI cannot be taken advantage
of. And the fact that another informal guidance with a different view was
available should have been noted by the appellant.
CONCLUSION
Carefully used, and in the spirit in which the Scheme has been conceived,
informal guidance can be a useful method to resolve legal issues in a fairly
speedy manner and with a reasonable degree of assurance. Informal guidance
given in the past in other cases also provides a window to the mind of SEBI in
respect of certain issues. The possible pitfalls should, however, be noted.
It’s almost always possible
to be honest and positive
—
Naval Ravikant
Be willing to be a beginner every single morning
— Meister Eckhart
